Choosing an appropriate structure for your business is an important decision. If you are currently operating as a sole trader, you may want to consider the benefits of incorporating a limited company.

Sole trader

Many businesses start off as sole traders, being a business run by an individual in his or her name under a trade name. The reason for this is that it is a simple business structure and is easy and relatively cheap to set up. As a sole trader, the responsibility for all aspects of the business rests solely on you: you are personally liable for the debts and other liabilities of the business, you own the assets of the business, and you are taxed personally on the business income.

This structure is suitable for small businesses in their infancy, however, as your business grows, you may want to consider another business structure to better support your business needs and protect your personal liability.

Private company limited by shares

The most common type of incorporated business structure is a private company limited by shares. This type of company is owned by shareholders and managed by directors – all of whom may be you. One of the key advantages of a limited company is that a company has separate legal personality. This simply means that the company exists independently of its shareholders and directors and can therefore contract on its own behalf and sue and be sued in its own name. As a result, the liability of shareholders is limited to the value of their shares and the company itself is on the hook for any debts or liabilities.

In addition to the limited liability, this structure has a number of benefits for businesses, including potentially being more tax efficient and certainly providing a more secure structure. Many parties are more likely to transact with an incorporated structure than a sole trader.

How to change from sole trader to a limited company

In order to change from a sole trader to a limited company, the most important step is to incorporate your company at Companies House. This is a simple process, and one on which we regularly advise.

As part of this process, you will need to choose a company name. Our blog discusses the key considerations and rules around choosing your company name.

This process also involves deciding who the shareholders and directors of the new company will be – you can either bring others into your business, or you can be the sole director and the sole shareholder.

If there are any business assets, these should be transferred from you to the newly formed limited company. Consider if any intellectual property, other property, employees or contracts will need to be transferred to the company. This can be done by way of an asset transfer agreement. Typically, the value would be placed on your transferring business and the new company would issue to you shares of an equivalent value.

Key considerations

  •  There are certain costs associated with setting up a company, including incorporation fees and fees associated with transferring any assets.
  • A company also has filing requirements, including annual filing of a confirmation statement and accounts and filing of information in respect of directors and persons with significant control. Not only does this mean that certain information will be publicly available at Companies House, but companies can face penalties if this information is not provided to Companies House on time.
  • •Different tax rules will apply and these should be considered before making a decision to change to a limited company. HMRC will require to be notified if your business structure changes.

How we can help

We regularly advise clients on the most appropriate type of business structure for their needs and effect change where this is the right arrangement for the client. If you are thinking of changing your business structure, or if you are looking for any advice in this area, please get in touch.